Waiting to exhale

But with the economy in a funk and the venture-funding spigot clamped shut, the general partner at Woodside, Calif.-based Crosspoint Venture Partners has to work harder to find worthy entrepreneurs. Dorrian is a frequent speaker at San Francisco Bay Area investment conferences, and he's eager to describe the kind of business plan that catches his eye.

Hint: The plans are not hastily crafted, jargon-filled business models jotted onto cocktail napkins by MBA students.

In a nutshell, what happened to the venture-capital industry in the past year?
Primarily, the investment mode that people were operating in has completely collapsed. The situations from a year ago and now couldn't be more diametrically opposed. We've gone from blind faith to blind fear. Unfortunately for the entrepreneurs, it's a very tough environment. The uncertainty is the cause. People look and say they don't know what the public market wants.

The relative beating that a lot of the stocks have taken has chilled the investment appetite because what used to be a model--the thing that makes an interesting business--is no longer a valid model. That's the problem. There's no real backdrop to make your investment decision by...You can have a really good company that's performing, and it still may not be a good investment because the public markets may not value it.

Are you saying you're taking a pass on companies that you think have interesting, potentially valuable products or services? Maybe I'm just working under a false assumption that you're in the business to fund those kind of companies, but that doesn't make sense to me.
There's no question that good companies are being sacrificed in this environment. Part of the reason it works that way has to do with the stage of funding a company is at. I think every VC fund out there would love to save all of their companies. But let's say it's a company you invested in three or four years ago in a fund that's now four or five years old. You just don't have enough money left in the fund to support that company to profitability. It may be a good company, but you just can't get them to profitability. They have a mile to go, and you only have the gas for a half-mile. Good companies are falling through no fault of their own or of their investors. They're still falling through the cracks.

It sounds like you're operating a triage system. Obviously you chop off the dead wood and you save your brightest performers. But for the vast majority of companies somewhere in the middle, how do you pick which to feed and which to starve?
It isn't like you really want to be put in a position where you're choosing from within your portfolio. Realistically, you don't make the investment to begin with if you don't think the company can survive. But we have to have an exit strategy--that's the problem right now: There doesn't seem to be many exit strategies.

The variable is ultimately the public market and the message that it's delivering. It doesn't have much interest in IPOs. It's not really valuing tech companies highly. With those messages, as investors you try to figure out, "What will investors want and when will they want it?" That's a tough one. I don't think anybody is saying in the next couple of quarters things are going to be much different. A lot of prominent people have come out and said the economy will be bad for the next two or three quarters, which gives a lot of tech buyers an excuse not to spend money, which further exacerbates the problem.

Are VCs simply running out of money, or have they gotten stingy and decided to sit on hordes of cash? Are we going to see a slew of bankruptcies and closures in the VC community?
There is still money out there. It's sitting in institutions, pension funds, endowments. An enormous amount of wealth was created over the years, which is now sitting in those funds. If you're a reputable firm, you can still raise a fund. But what's not happening is--those firms aren't trying to raise new funds because the environment is not great.

If the market is asleep and you're not giving out funding, what do you do all day? Hit the golf course?
To be honest, people are working really hard right now. Nobody that I'm aware of wants to see the hard work they've already put in go down the drain. People are working very hard to help their companies survive and if necessary raise new funds. I'd argue that during the good times, there are a few too many people on the golf courses. People take pride in what they do no matter what, but if anything, your companies that you have invested in are leaning on you and asking for more help, not less.

Given the tough environment and the fact that many good companies are failing through no fault of their own, are you worried about a collective morale drain among entrepreneurs?
To some degree. I think real entrepreneurs are kind of a statistical percentage of the population. It's the same as saying there's a statistical percentage that has blue eyes. It's not going to change. Those are the ones you're trying to find. They have belief and faith and they're doing something over and above a strict monetary reward.

There are often times when people who aren't part of that statistical category enter into it and get mesmerized by obvious financial gain. When times get tough, they go back to wherever their comfort zone is.

Lots of executives get angry when their VCs make them fire half the staff or go on another belt-tightening mission. How do you wield the sword in a vaguely humanitarian or diplomatic way?
If a company is succeeding at their mission and generating real value, I don't see any rush to get employees out the door. The companies that are doing what is necessary to survive are actually more appreciated by their employees. As difficult as it may be, some companies have been downsizing and reducing work forces. While that's very unpleasant for people who lose their jobs, the ones who are still there ironically appreciate that management is doing what's difficult but necessary. It's a sign that management intends to survive. Employees appreciate that instead of having everyone stand around as the money runs out.

Lots of investors say that the VC community rushed too many companies into public markets too quickly, in part causing the Internet stock bubble and the corresponding burst. How much blame do you personally assume for the downturn?
I guess we accepted an invitation to the party. A big party started raging and no one's quite sure of who originally threw it, but everyone participated, all the way through the buy side and institutional funds. They made a lot of money buying stocks that had momentum. The bankers certainly packaged a lot of companies and evangelized the salient points about what brilliant futures these companies had. Clearly, there was a certain amount that was just unknown about what real models would emerge. Some of it was speculative, but everybody participated. Some venture funds accelerated their pace of investment, and they became more speculative than is normal and decreased their skepticism, but that's as best as I can describe it.

What did you learn from the downturn?
It's been a crystallization of investment theory in general: Find something with a genuine value proposition led by a competent team and fundable in a realistic manner. Venture funds are not good at building companies if it costs $1 billion to create them. If it's a manageable amount of money, that's a play for funding.

In the late 1990s and early 2000, VCs were treated like rock stars: They graced the covers of mainstream magazines and they were all over the television. What's it like to go back to being just another businessman?
Are you saying we've faded from the party? We have? No we haven't! No, I'm just kidding. It's a personal thing. As in every industry, there are people who really enjoy the spotlight and view it as a normal function of their marketing to stay out front, and they treat it as a tool. That's where I see it. It's good for the market to understand our investment philosophy. But my kids don't think I'm a rock star, and I don't think they ever have. And that's basically OK with me.